Investing in China: five fund picks for the Year of the White Rat

Adrian Lowcock, head of personal investing at Willis Owen, analyses the outlook for investing in China in 2020 and gives five ideas for investors to take advantage of the world’s second largest economy.

China’s economy grew at 6.1% in 2019 – the slowest rate in 29 years. For most major Western economies, 6.1% would be nothing to sniff at, but for the world’s second largest economy it presents a problem. Have we seen the end of the high-powered growth of the past?

Last year was tough thanks to the US/China trade war, a global slowdown and government policy hangovers. 2020 should be steadier with possible trade deals, a stabilising global economy, more stimulus to support growth targets, and other factors helping.

Much of the weakness was due to uncertainty caused by US-China trade tensions and, in turn, a global economic slowdown.

The Chinese government’s previous efforts to rein in systemic economic risks - in particular the crackdown on excess debt and property price control efforts in 2018 - combined with the trade war weighed heavily on the Chinese market.

The scope of tensions between the US and China have gone beyond trade and into other strategic areas such as technology and capital markets. Tensions between the two sides will be a drag on investment and global growth for the foreseeable future.

However, China has responded and has shifted focus onto greater technological self-sufficiency. Increasing support in strategic industries such as aerospace, IT, semiconductors, robotics will provide some attractive opportunities for investors as ‘national champions’ begin to emerge.

Plus, political instability in Hong Kong is unlikely to deter foreign investors for long, as the market remains the most attractive and quickest way to access Chinese companies.

China was cautious on monetary and fiscal policy in 2019 as it has focused on managing longer-term risks. The Peoples Bank of China will need to continue to strike a balance between supporting economic growth and de-risking in the shadow-banking sector. 

Although the global economic outlook has improved, it remains weak. Alongside a soft domestic economy the Chinese government is likely to act through a combination of easing monetary conditions, as the central bank introduces measures to improve the availability of loans and fiscal stimulus. 

As such we could see greater fiscal support in the Year of the White Rat, through the government’s tax and spending policies. This was mostly disappointing in 2019 but there was some pick up in the second half of the year.

2020 is the last year of China’s 13th Five-year plan and to meet its target of doubling the economy between 2010 and 2020 it will need to deliver 6% GDP growth in 2020. Fiscal stimulus can help that.

Valuations are below average and earnings look set to pick up.  With valuations for the overall MSCI China Index slightly below their long-term average, the market looks attractive. The Chinese story has moved to more domestically oriented businesses, which we believe will benefit from China’s medium term growth.

As the headwinds fade, we expect China’s economy to stabilise in 2020. A trade deal with the US will help the region. A global economic recovery should also support the country as it continues to rely on exports.

With the prospects looking better for China in 2020, investors interested in the sector can position themselves to take advantage of renewed growth and easier monetary conditions. Here are five funds that invest either wholly or partly in China for investors to consider:

  • Fidelity China Focus: Manager Jing Ning adopts a benchmark-aware approach with a clear value tilt. She focuses on companies that have been disregarded by the market due to economic or company-specific reasons, but have the potential to turnaround over the long run.
  • Fidelity Emerging Asia: Dhananjay Phadnis took control in 2013. The key tenets are finding companies with economic moats, management quality and valuations. Phadnis has an excellent knowledge of each of his holdings and runs a concentrated portfolio of 60-80 stocks.
  • First State Greater China: Portfolio manager Martin Lau has proved to be an expert investor by delivering impressive returns across his Asian and Greater China equity mandates. His UK-domiciled First State Greater China Growth is an All-cap strategy with a relatively concentrated portfolio of 55-60 names.
  • Janus Henderson China Opportunities: Manager Charlie Awdry favours an active and relatively unconstrained approach, but he is kept abreast of portfolio risks by the internal team. Portfolio construction for this fund follows the manager's views of the industry and companies which can result in large differences to the benchmark.
  • Schroder Asian Alpha Plus: Manager Matthew Dobbs is an experienced investor with excellent stock picking skills. He looks for companies with a particular focus on visible earnings growth and sustainable returns at a reasonable price. The analysts focus on company strategy and assess competitive position and growth prospects.

Adrian Lowcock is head of personal investing at Willis Owen. 

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